10QSB

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

ýQUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 0-26962

A.D.A.M., INC.

(Exact Name of Registrant as Specified in its charter)

Georgia	58-1878070
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
1600 RiverEdge Parkway, Suite 100 Atlanta, Georgia 30328-4658
(Address of Principal Executive Offices, Zip Code)
N/A
(Former Name or Former Address, if changed since last report)

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 14, 2003 there were 7,710,728 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding (excluding shares held in treasury by the Registrant).

Transitional Small Business Disclosure Format. YES  o   NO  ý

A.D.A.M., Inc.

Index

Form 10-QSB for the Quarter Ended September 30, 2003

Part I—Financial Information
ITEM 1. Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2003 (unaudited) and  December 31, 2002 (audited)
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2003 (unaudited)
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Controls and Procedures
Part II—Other Information
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 6. Exhibits and Reports on Form 8-K

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PART I:   FINANCIAL INFORMATION

ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A.D.A.M., Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	September 30, 2003			December 31, 2002
	(unaudited)			(audited)
Assets
Current assets:
Cash and cash equivalents	$	4,540		$	2,220
Accounts receivable (net of allowances of $115 and $122, respectively)	742			1,288
Inventories, net	68			84
Interest bearing note receivable	50			—
Non-interest bearing note receivable (net of unamortized discount of $0 and $1, respectively)	—			34
Prepaids and other assets	312			212
Total current assets	5,712			3,838
Property and equipment, net	208			226
Intangible assets, net	1,617			2,249
Goodwill	2,043			2,043
Restricted time deposits	256			257
Note receivable from related party	54			78
Total assets	$	9,890		$	8,691
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	536		$	697
Deferred revenue	2,177			1,916
Current portion of capital lease obligations	11			19
Total current liabilities	2,724			2,632
Capital lease obligations (net of current portion)	39			47
Total liabilities	2,763			2,679
Shareholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; no shares isued and outstanding
Common stock, $.01 par value; 20,000,000 authorized; 7,532,950 and 7,041,384 shares issued and outstanding, respectively	75			70
Common stock warrants	353			353
Additional paid-in capital	48,030			47,363
Note receivable from shareholder	(291		)	(291		)
Deferred compensation for services	(68		)	—
Accumulated deficit	(40,972		)	(41,483		)
Total shareholders’ equity	7,127			6,012
Total liabilities and shareholders’ equity	$	9,890		$	8,691

The accompanying notes are an integral part of these condensed consolidated financial statements.

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A.D.A.M., Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003		2002
Total revenues	$	1,873	$	2,283		$	6,151	$	6,543
Operating expenses:
Cost of revenues	420		360			1,296		1,021
General and administrative	487		636			1,312		1,727
Product and content development	281		592			1,124		1,906
Sales and marketing	392		793			1,353		2,262
Depreciation and amortization	217		220			588		714
Total operating expenses	1,797		2,601			5,673		7,630
Operating income (loss)	76		(318		)	478		(1,087		)
Interest income (expense), net	10		10			33		53
Income (loss) before losses from affiliate	86		(308		)	511		(1,034		)
Losses from affiliate	—		(111		)	—		(179		)
Net income (loss)	$	86	$	(419	)	$	511	$	(1,213	)
Basic net income (loss) per common share	$	0.01	$	(0.06	)	$	0.07	$	(0.17	)
Basic weighted average number of common shares outstanding	7,421		6,975			7,163		7,194
Diluted net income (loss) per common share	$	0.01	$	(0.06	)	$	0.06	$	(0.17	)
Diluted weighted average number of common shares outstanding	8,325		6,975			7,973		7,194

The accompanying notes are an integral part of these condensed consolidated financial statement.

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A.D.A.M., Inc.

Condensed Consolidated Statement of Changes in Shareholders’ Equity

(In thousands)

(unaudited)

	Common Stock				Additional Paid-in Capital		Common Stock Warrants		Accumulated Deficit			Note Receivable from Shareholder			Deferred Compensation for Services			Total
	Shares		Amount
Balance at December 31, 2002	7,041,384		$	70	$	47,363	$	353	$	(41,483	)	$	(291	)	$	—		6,012
Net income	—		—		—		—		511			—			—			511
Issuance of restricted shares and related deferred compensation in connection with stock purchase agreement for services.	75,000		1		132		—		—			—			(68		)	65
Exercise of common stock options	30,000		1		13		—		—			—			—			14
Sale of common stock under equity purchase agreement	386,566		3		522		—		—			—			—			525
Balance at September 30, 2003	$	7,532,950	$	75	$	48,030	$	353	$	(40,972	)	$	(291	)	$	(68	)	$	7,127

The accompanying notes are an integral part of these condensed consolidated financial statements.

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A.D.A.M., Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Nine Months Ended September 30,
	2003			2002
Net cash provided by operating activities	$	2,146		$	331
Investing activities
Purchases of property and equipment	(89		)	(48		)
Proceeds from sale of property and equipment	7			2
Redemption of restricted time deposit	1			228
Repayments on notes receivable	74			97
Software development costs	(371		)	(582		)
Investment in affiliate	—			(250		)
Acquisition and asset purchase, net of cash acquired	—			(94		)
Net cash used in investing activities	(378		)	(647		)
Financing activities
Repayments on capital leases	(17		)	(25		)
Proceeds from sales of common stock	555			—
Repurchase of common stock	—			(717		)
Proceeds from exercise of common stock options	14			35
Net cash provided by financing activities	552			(707		)
Increase in cash and cash equivalents	2,320			(1,023		)
Cash and cash equivalents, beginning of period	2,220			2,878
Cash and cash equivalents, end of period	$	4,540		$	1,855
Interest paid	$	6		$	7

The accompanying notes are an integral part of these condensed consolidated financial statements.

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A.D.AM., Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

September 30, 2003

1. BUSINESS AND BASIS OF PRESENTATION

Business

A.D.A.M. serves healthcare organizations, medical professionals, health-interested consumers and students as a leading developer of visually engaging health and medical information products. Our products are used for learning about health, wellness, disease, treatments, alternative medicine, nutrition, anatomy and general medical reference in both the healthcare and education markets. Our products contain physician-reviewed text, in-house developed medical graphics and multimedia to create health information that offers a unique “visual learning” experience. Today, we employ a growing range of media, including Internet, software, CD ROM, television and print to deploy its proprietary content assets and products.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, the general instructions to Form 10-QSB and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. These interim financial statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Certain amounts in the prior years’ financial statements have been reclassified to conform with the current year presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any future period.

2. STOCK BASED COMPENSATION

We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations and we provide the disclosures as required by SFAS No. 123, “Accounting for Stock-Based Compensation.” Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount an employee must pay to acquire the stock.

We did not expense any stock option compensation cost during the three or nine months ended September 30, 2003 and 2002. Had we determined compensation costs using a fair value based methodology at the grant date for our stock options under SFAS 123, our pro forma consolidated net income (loss) would have been as follows (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
Net income (loss) as reported	$	86		$	(419	)	$	511		$	(1,213	)
Deduct total stock-based employee compensation expense determined under fair-value base method	$	(213	)	$	(388	)	$	(691	)	$	(1,516	)
Pro forma net (loss) income	$	(127	)	$	(807	)	$	(180	)	$	(2,729	)
Basic net income (loss) per share
As reported	$	0.01		$	(0.06	)	$	0.07		$	(0.17	)
Pro forma	$	(0.02	)	$	(0.12	)	$	(0.03	)	$	(0.38	)
Diluted net income (loss) per share
As reported	$	0.01		$	(0.06	)	$	0.06		$	(0.17	)
Pro forma	$	(0.02	)	$	(0.12	)	$	(0.03	)	$	(0.38	)

3. CONSULTING AGREEMENT

On February 15, 2003, we entered into a Restricted Common Stock Purchase Agreement with James T. Atenhan and Victor P. Thompson (each a “Purchaser”) in connection with a consulting agreement with a financial services firm controlled by the Purchasers. Each Purchaser purchased 37,500 shares of our common stock at a purchase price of $.40 per share. The purchase price of our common stock was discounted from the $.78 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for services of $28,500. This deferred compensation was expensed over the six-month service period.

On August 1, 2003, we entered into a second Restricted Common Stock Purchase Agreement with the Purchasers in connection with a twelve-month extension of the consulting contract. Each Purchaser has agreed to purchase 38,889 shares of our common stock at a purchase price of $.90 per share. The purchase price of our common stock is discounted from the $1.86 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for

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services of $74,667. As of September 30, 2003, the shares had not been issued in connection with the agreement. This deferred compensation will be expensed over the twelve-month service period beginning September 1, 2003.

4. COMPREHENSIVE INCOME (LOSS)

Our comprehensive income (loss) for the three and nine months ended September 30, 2003 and 2002, as required to be reported by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 130, was identical to the actual income (loss) reported for those periods.

5. ACQUISITION OF NIDUS INFORMATION SERVICES, INC.

In February 2002, we acquired 100% of the outstanding common stock of Nidus Information Services, Inc. (“Nidus”) in exchange for 260,000 shares of our common stock. Nidus was a privately held provider of in-depth patient education reports on common health conditions and diseases.

In accordance with SFAS 141, the total purchase price was allocated to the net tangible assets and intangible assets, including goodwill, acquired based on the estimated fair value at the date of acquisition. The results of Nidus’ operations have been included in our consolidated financial statements since February 14, 2002.

The following table summarizes the allocation of the fair values of the assets acquired and liabilities assumed at the date of acquisition and any subsequent adjustments to the allocation (in thousands):

	Nidus Purchase Price Allocation March 31, 2002			Allocation Adjustment		Nidus Adjusted Purchase Price Allocation September 30, 2003
Current assets	$	41				$	41
Property and equipment	—					—
Intangible assets	560					560
Goodwill	658			18		676
Total assets acquired	1,259					1,277
Current liabilities	—					—
Deferred revenue	(118		)	(18	)	(136		)
Long-term liabilities	—					—
Total liabilities assumed	(118		)			(136		)
Net assets acquired	$	1,141				$	1,141

The following unaudited pro forma financial information reflects our results of operations for the three and nine months ended September 30, 2002, as if the Nidus acquisition had occurred on January 1, 2002. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the Nidus acquisition actually taken place on January 1, 2002 and may not be indicative of future operating results. The unaudited pro forma results are summarized as follows (in thousands, except per share amounts):

	Three Months Ended September 30, 2002			Nine Months Ended September 30, 2002
Revenues	$	2,283		$	6,605
Net loss	$	(419	)	$	(1,294	)
Basic net loss per share	$	(0.06	)	$	(0.18	)
Diluted net loss per share	$	(0.06	)	$	(0.18	)

6. INTANGIBLE ASSETS

Intangible assets consist of purchased intellectual content, purchased customer contracts, capitalized software development costs for products to be sold, leased or otherwise marketed, and software development costs for internal use.

Purchased intellectual content and purchased customer contracts represent intangible assets acquired in December 2001 from Integrative Medicine Communications, Inc. and in February 2002 from Nidus (see Note 5). In addition, purchased intellectual content includes assets that were purchased from HIP International, Inc. in January 2002. The following table shows the allocation of the purchase price to intangibles with a definite life and their amortization period (in thousands):

	Purchase Price		Amortization Period	2003		2004		2005
Assets
IMC
Purchased intellectual content	$	807	3 Years	$	269	$	247	$	—
Purchased customer contracts	$	246	2 Years	$	113	$	—	$	—
NIDUS
Purchased intellectual content	$	472	3 Years	$	157	$	157	$	20
Purchased customer contracts	$	88	2 Years	$	44	$	6	$	—
				$	583	$	410	$	20

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Capitalized software development costs for products to be sold, leased or otherwise marketed consist principally of salaries and certain other expenses directly related to the development and modifications of software products capitalized in accordance with the provisions of SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Amortization of capitalized software development costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which we have determined to generally be twenty-four months.

In accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, we expense costs incurred in the preliminary project planning stage, and thereafter, capitalizes costs incurred in the developing or obtaining of internal use software. Costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized over their estimated useful lives, which is three years.

Intangible assets are summarized as follows (in thousands):

	Estimated amortizable lives (years)	September 30, 2003			December 31, 2002
Capitalized software products to be sold, leased or otherwise marketed	2	$	2,800		$	2,499
Software developed for internal use	3	500			430
Purchased intellectual content	3 - 5	1,430			1,430
Purchased customer contracts	2	333			333
Intangible assets, gross		5,063			4,692
Less accumulated amortization:
Capitalized software products to be sold, leased or otherwise marketed		(2,176		)	(1,755		)
Software developed for internal use		(188		)	(88		)
Purchased intellectual content		(786		)	(429		)
Purchased customer contracts		(296		)	(171		)
Accumulated amortization		(3,446		)	(2,443		)
Intangible assets, net		$	1,617		$	2,249

Amortization expense, which includes the amortization of capitalized software reported in cost of revenues, for the three months ended September 30, 2003 and 2002 was $346,000 and $339,000, respectively. Amortization expense for the nine months ended September 30, 2003 and 2002 was $1,004,000 and $912,000, respectively.

7. RECENT ACCOUNTING PRONOUCEMENTS

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other things, this statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” (SFAS No. 4), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30, “Reporting the Results of the Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” which requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations, will now be applied. We adopted this new standard effective January 1, 2003 and it did not have a significant effect on our financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146,”Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” We adopted this new standard effective January 1, 2003 and it did not have a significant effect on our financial position, results of operations or cash flows.

In November 2002, the FASB issued SFAS Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the interpretation are effective for financial statements of periods that end after December 15, 2002 and we have adopted the disclosures requirements. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The adoption of FIN 45 did not have a significant effect on our financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock Based Compensation—Transition and Disclosure—an Amendment to SFAS 123.” SFAS 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are not required for interim periods in addition to the traditional annual disclosure. The amendments to SFAS 123, which provides for additional methods, are effective for periods beginning after December 15, 2002, although earlier application is permitted. The amendments to the disclosure requirements are required for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002 (see Note 2).

In January 2003, the FASB issued SFAS Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities, and activities of a variable interest entity. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. The adoption of FIN 46 did not have a significant effect on our financial position, results of operations or cash flows.

8. EQUITY PURCHASE AGREEMENT

On May 22, 2002, we entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. Pursuant to this agreement, Fusion Capital agreed to purchase up to an aggregate of $12,000,000 of our common stock. We have the right to sell up to $15,000 of our common stock per trading day under this agreement unless our stock price equals or exceeds $7.00, in which case the daily amount may be increased at our option. Fusion Capital is not obligated to purchase any shares of our common stock on any trading days that the market price of our common stock is less than $1.00. Since we registered 3,500,000 shares for sale to Fusion Capital pursuant to the agreement, the selling price of our common stock to Fusion Capital will have to average at least $3.43 per share for us to receive the maximum proceeds of $12,000,000 without registering additional shares of common stock, which we have the right but not the obligation to do. Assuming a purchase price of $1.00 per share and the purchase by Fusion Capital of the full 3,500,000 shares under the agreement, proceeds to us would be $3,500,000. If we decided

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to sell more than the 1,352,100 shares to Fusion Capital (19.99% of our outstanding shares as of May 22, 2002, the date of the agreement, exclusive of the 160,000 shares issued to Fusion Capital as a commitment fee), we would first be required to seek shareholder approval of the agreement in order to be in compliance with Nasdaq rules. We may, but shall be under no obligation to, request our shareholders to approve the transaction contemplated by the agreement. We may terminate the agreement at any time, and Fusion Capital may terminate the agreement at any time after approximately 40 months following the date the purchase obligation under the agreement became effective. During the three months ended September 30, 2003, we sold 121,213 shares for $200,000, under this agreement. During the nine months ended September 30, 2003, we sold 386,566 shares for $525,000, under this agreement.

9. EARNINGS (LOSS) PER COMMON SHARE

Net income (loss) per share is computed in accordance with SFAS No. 128, “Earnings Per Share.” We compute basic income (loss) per share by dividing net income by the weighted average number of issued common shares for each period. Diluted income (loss) per share is based upon the addition of the effect of common stock equivalents (stock options and warrants) to the denominator of the basic income (loss) per share calculation using the treasury stock method, if their effect is dilutive. The computation of income (loss) per share for the three and nine months ended September 30, 2003 and 2002 is as follows (in thousands, except per share data):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003		2002
Net income (loss)	$	86	$	(419	)	$	511	$	(1,213	)
Weighted average common shares outstanding	7,421		6,975			7,163		7,194
Weighted average common shares equivalents (stock options and warrants)	904		—			810		—
Weighted average diluted common shares outstanding	8,325		6,975			7,973		7,194
Net income (loss) per share:
Basic	$	0.01	$	(0.06	)	$	0.07	$	(0.17	)
Diluted	$	0.01	$	(0.06	)	$	0.06	$	(0.17	)
Anti-dilutive stock options and warrants outstanding	2,605		2,863			2,623		2,863

For the three and nine months ended September 30, 2002, diluted net loss per share does not differ from basic net loss per share since potential common shares from the exercise of stock options and warrants are all treated as anti-dilutive. We had 2,605,000 and 2,623,000 options and warrants outstanding which were anti-dilutive for the three and nine months ended September 30, 2003, respectively, and 2,863,000 options and warrants outstanding which were anti-dilutive for the three and nine months ended September 30, 2002.

10. NON-CONSOLIDATED AFFILIATE

We have one non-consolidated affiliate, ThePort Network, Inc. (formerly ThePort.com, Inc.) (“ThePort”). As of September 30, 2003, we had an approximate 35% voting interest in ThePort and this investment was accounted for under the equity method. Our voting interest increased from December 31, 2002 due to our Series B preferred stock investment being converted into common stock at a one-to-five conversion rate. As of September 30, 2003 and December 31, 2002, the carrying value of this investment was $0. We have no future obligations to fund ThePort.

11. RELATED PARTY TRANSACTIONS

Sublease with A.D.A.M Board Member

On April 2, 2001, for a term beginning on January 1, 2001, we signed an 18-month sublease agreement with a company whose Chief Executive Officer is an A.D.A.M. board member. We received 8,333 shares of the tenant’s common stock monthly over the term of the agreement, which ended June 30, 2002. From June 30, 2002 through December 31, 2002, we continued to sublease space to this company on a month-to-month basis for the same monthly consideration. The shares were valued at the fair market value of the rent on the leased space and were recorded on our balance sheet as a long-term asset. As of September 30, 2003 and December 31, 2002, the shares were valued at $0. Additionally, we received warrants to purchase 25,000 common shares of the tenant that became fully exercisable on January 1, 2002. From December 2002 through September 2003, we allowed the tenant to occupy this space and did not collect any lease payments. Beginning in October 2003, we began collecting cash lease payments of  $785 per month from the tenant to occupy this space. Under the terms of an amendment to the lease agreement, we have the right to require the tenant to vacate the space upon 30 days notice.

Promissory Note with A.D.A.M’S Chief Executive Officer

On May 30, 2001, we received a full-recourse Promissory Note from our Chief Executive Officer for approximately $341,000 for the exercise of 150,000 options at $1.94 per share, which included a $50,000 loan to pay taxes related to the stock exercise. The note earns interest of 6.25% per annum and is due in full on or before May 29, 2006. Part of the note, $291,000, is secured by 150,000 shares of our common stock and is recorded in shareholders’ equity. Through September 30, 2003, approximately $49,000 of interest has accrued on this note of which $45,000 has been paid, leaving a remaining interest balance of approximately $4,000.

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Investment and Sublease with ThePort Network, Inc.

On April 10, 2002, for a term beginning on November 1, 2001, we entered into an 8-month sublease agreement with ThePort Network, Inc. (“ThePort”). We received 14,044 shares of ThePort’s common stock monthly over the term of the agreement, which ended on June 30, 2002. The shares are valued at the fair market value of the rent of the leased space. As of September 30, 2003 and December 31, 2002, the carrying value of this investment was $0. After the expiration of the sublease on June 30, 2002, we have continued to sublease this space to ThePort on a month-to-month basis for the same monthly consideration.

In connection with our preferred stock investment in ThePort during the year ended December 31, 2001, we entered into a five-year agreement whereby we had exclusive distribution rights to ThePort’s products within the healthcare industry. As of December 31, 2001, we had pre-paid $125,000 of the contract fee to be applied against future subscription fees. We had committed to generate $1,500,000 in subscription fees during the initial term of the original agreement. The initial term of the agreement commenced on August 20, 2001 and continued for five years from that date. On February 14, 2003, ThePort agreed to accept a payment of $125,000 from us to release us from the minimum guarantee in its entirety. ThePort retained the $125,000 pre-payment previously made and we were granted non-exclusive rights to ThePort’s products within the healthcare industry.

Our Chief Operating Officer served on the Board of Directors of ThePort from December 2001 through August 2002. Our Chief Executive Officer, who currently serves as the Chairman of the Board of Directors of ThePort, has acquired an approximate 10% voting interest in ThePort and holds a convertible note and loans from ThePort in the amount of approximately $919,000 at September 30, 2003. This represents a decrease in his ownership from the 14% percentage voting interest held at December 31, 2002, which is due to Series B preferred stock being converted into common stock at a one-to-five conversion rate. Two of our other directors also own equity interests in ThePort.

12. COMMITMENTS

We have entered into certain agreements to license content for services from various unrelated third parties. We also have contractual obligations at September 30, 2003 relating to real estate, capital and operating lease arrangements.

We do not have any investments in joint ventures or special purpose entities, and do not guarantee the debt of any third parties. Our subsidiaries are 100% owned by us and are included in our condensed consolidated financial statements. Our headquarters are located in approximately 12,000 square feet of leased office space in Atlanta, Georgia. The space is leased for a term ending in September 2008.

Total payments due and estimated under license agreements and real estate, operating and capital leases for the remainder of 2003 and beyond are listed below (in thousands):

	License Agreements		Real Estate Leases		Operating Lease		Capital Lease
2003	$	53	$	65	$	11	$	4
2004	210		225		33		15
2005	100		229		3		15
2006	—		234		—		15
2007	—		239		—		11
Thereafter	—		182		—		—
Total future minimum lease payments	$	363	$	1,174	$	47	60
Less - amounts representing interest							(10		)
Present value of future minimum lease payments							50
Less - current portion							(11		)
							$	39

We are party to employment agreements with certain executives that provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances.

13. CONCENTRATIONS

For the nine months ended September 30, 2003 and September 30, 2002, one customer accounted for approximately 9% and 27% of revenues, respectively. For the three months ended September 30, 2003 and September 30, 2002, this customer accounted for 0% and approximately 25% of revenues, respectively. This customer’s license agreement with us expired during March 2003 and we have not received any revenues from the customer since that time.

14. INCOME TAXES

No provision for income taxes has been reflected for the three or nine months ended September 30, 2003 as we have sufficient net operating loss carry forwards to offset taxable income. As of September 30, 2003, we continue to maintain a valuation allowance against our total net deferred tax asset balance.

15. LEGAL PROCEDINGS

On April 25, 1996, a shareholders’ class action lawsuit was filed in Fulton County Superior Court in Atlanta, Georgia against us and certain of our then officers and directors. The complaint alleges violations of Sections 11, 12(2) and 15 of the Securities Act of 1933 and violations of the Georgia Securities Act arising out of alleged disclosure deficiencies in connection

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with our initial public offering of common stock, which was completed on November 10, 1995. The complaint seeks compensatory damages in an unspecified amount.

We and our officers and directors have opposed the plaintiff’s written motion for class certification. A hearing on the motion was held on January 30, 2003, but the Court has not yet ruled. The parties are currently exchanging information during the discovery period. We have reached our retention amount with our directors’ and officers’ (“D & O”) liability insurance provider. Accordingly, the D & O insurance provider has begun advancing the costs of defending this action. We believe that we have meritorious defenses and intend to defend the action vigorously.

We are subject to other legal proceedings and claims that have arisen in the ordinary course of our business; however, we believe that the ultimate resolution of these matters and the shareholders’ lawsuit will not have a material adverse effect on our consolidated financial statements taken as a whole.

16. SUPPLEMENTAL CASH FLOW

Cash and cash equivalents include cash on hand and on deposit and highly liquid investments with an original maturity of three months or less. For the nine months ended September 30, 2003 and September 30, 2002 we made cash interest payments of approximately $6,000 and $7,000, respectively.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

We serve healthcare organizations, medical professionals, health-interested consumers and students as a leading developer of visually engaging health and medical information products. Our products are used for learning about health, wellness, disease, treatments, alternative medicine, nutrition, anatomy and general medical reference in both the healthcare and education markets. Our products contain physician-reviewed text, in-house developed medical graphics and multimedia to create health information that offers a unique “visual learning” experience. Today, we employ a growing range of media, including Internet, software, CD ROM, television and print to deploy our proprietary content assets and products.

Our proprietary content and technology assets include:

•an illustrated, physician reviewed Health Encyclopedia that covers approximately 3,600 diseases, medical conditions, symptoms, surgeries, nutrition and tests;

•approximately 40,000 medical illustrations that we have drawn and compiled;

•an extensive library of 3D models developed from the Visible Human Project and other sources;

•thousands of web-enabled animations depicting disease states and other medical conditions and topics, many of which are broadcast-quality;

•interactive tools that complement and enhance the functionality of  our health content products;

•unique technology for viewing the human body’s anatomy; and

•a proprietary content management system we use to manage and publish our digital assets.

Collectively, we believe these assets represent the single largest database of proprietary health and medical related content anywhere in the world.

We believe that pictures are worth a thousand words and that illustrated approaches to explaining complex medical conditions have a significant impact on the way people understand their bodies and medical conditions affecting them. We also believe that our products have an impact on the way patient education is delivered and used in personal health management, prevention, disease management, and after-care applications. We believe we have the potential to capture a significant share of the consumer-patient health education market with our high-quality, medically accurate, visual and text based information—whether it is being distributed over the Internet, as a component of point-of-care applications within the health care system or as printed products that can be sold and disseminated in a variety of ways including subscriptions and “information prescriptions” given during patient- provider contacts.

Online health and medical information is one of the most popular searches Americans are making on the Internet. According to a July 2003 report published by the Pew Internet & American Life project, 80% of adult Internet users, or approximately 93 million Americans, have searched for at least one of 16 major health topics online. According to the report, the number of Americans searching for health information ranks as one of the most popular behind email at 93%, and researching a product or service before making a purchase at 83%. This compares to a similar survey conducted in March of 2002, also by Pew Internet project, which found 62% of Internet users, or approximately 73 million people, conducted online searches for health information. With this growing consumer demand, and the proliferation of patients taking an active role with their healthcare provider in their personal care management, we believe that our products will continue to play an increasing role in the product offerings of healthcare providers (particularly hospitals), the pharmaceutical industry, the health insurance and managed care industries, and with large employers who are faced with rising health care costs and loss of productivity due to employee health-related issues. These organizations are actively looking for ways to improve efficiencies, increase patient encounters, and communicate better with patients, plan members and employees.

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In addition, we have recognized the important role our products can have with the growing U.S. Hispanic population. With the Hispanic population rapidly approaching the largest minority group in the U.S., we believe that there will be an increasing need to provide health information to this important demographic segment. New legislation requiring federally funded organizations, such as hospitals and other healthcare providers, to translate information into other languages for people with limited English proficiency will fuel opportunities for Spanish versions of our health information products. We completed the Spanish translation of our Health Illustrated Encyclopedia, Pregnancy Health Center, and Surgeries and Procedures products in 2001. During 2002, we completed a bilingual version of our Health Illustrated Encyclopedia. Unlike a stand-alone translated product, the bilingual product is integrated and includes technology that offers the end user the ability to “toggle” between an English article and its equivalent, translated article in Spanish. We maintain a translation relationship with a third party vendor for editorial updates to our Spanish products.

We currently provide our health content products directly and indirectly to a broad range of customers, including hospitals, pharmaceutical companies, health plans, medical device and disease management vendors, employee benefit providers, and Internet portals that feature health information as part of their content offerings. With the downturn of the dot-com economy and the increased sales and marketing activities we have undertaken over the past two years, we have seen a significant shift in our revenue mix from the Internet portal market to the healthcare market.

We operate in one segment comprised of three markets: healthcare, Internet, and education.

We were incorporated in 1990 as A.D.A.M. Software, Inc. We changed our name to adam.com, Inc. in 1999 and to A.D.A.M., Inc. in 2001. We are headquartered in Atlanta, Georgia.

CRITICAL ACCOUNTING POLICIES

Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to product returns, product and content development expenses, bad debts, inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

We generate revenues mainly in two ways—Internet-based licensing and shipped product sales. Internet revenues consist primarily of license fees that usually consist of an annual, up-front fee that is initially recorded as deferred revenue. This revenue is recognized ratably over the term of the license agreement beginning after delivery has occurred, upon customer acceptance, when we have determined that the fees from the agreement are fixed and determinable and there are no significant returns or acceptance provisions. Product revenues represent the sales of software products and revenues earned under certain royalty agreements. Revenues from product sales are generally recognized at the time title passes to customers, distributors or resellers. Revenues from royalty agreements are recognized as earned based upon performance or product shipment.

Sales Returns Allowances and Allowance for Doubtful Accounts

Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Management must make estimates of potential future product returns related to current period product revenue. Allowances for estimated product returns are provided at the time of sale. We evaluate the adequacy of allowances for returns primarily based upon our evaluation of historical and expected sales experience and by

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channel of distribution. The judgments and estimates of management may have a material effect on the amount and timing of our revenue for any given period.

Similarly, management must make estimates of the uncollectability of accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Capitalized Software Development Costs

We capitalize internal software development costs in accordance with Financial and Accounting Standards Board (“FASB”) Statement No. 86 (“FAS 86”), “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” This statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. We cease capitalization of internally developed software when the product is made available for general release to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. We amortize such capitalized costs as cost of sales on a product-by-product basis using the straight-line method over a period of two years. We continually evaluate the recoverability of capitalized costs and if the successes of new product releases are less than we anticipate then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

We also capitalize internal software development costs in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 (“SOP 98-1”), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” This statement specifies that computer software development costs for computer software intended for internal use occurs in three stages: (1) the preliminary project stage, where costs are expensed as incurred, (2) the application development stage, where costs are capitalized, and (3) the post-implementation or operation stage, where again costs are expensed as incurred. We cease capitalization of developed software for internal use when the software is ready for its intended use and placed in service. We amortize such capitalized costs as cost of sales on a product-by-product basis using the straight-line method over a period of three years. We continually evaluate the usability of the products that make up our capitalized costs and if certain circumstances arise such as the introduction of new technology in the marketplace that management intends to use in place of the capitalized project, then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

Inventory

We record reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Legal Contingencies

We are subject to certain legal proceedings as discussed elsewhere in this report. Currently we do not believe that these matters will have a material impact on our financial results or financial position. This conclusion is based primarily on our insurance coverage for these matters. It is possible, however, that future results of operations for any particular quarter or annual period could be materially affected by changes in assumptions or other circumstances involving these legal matters.

Goodwill and Intangible Assets

We have recorded goodwill in connection with our acquisition of Integrative Medicine Communications, Inc. (“IMC”) in 2001 and Nidus Information Services, Inc. (“Nidus”) in 2002. In July 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

SFAS 141 requires the purchase method of accounting for all business combinations and that certain acquired intangible assets in a business combination be recognized as assets separate from goodwill. We have applied SFAS 141 in our allocation of the purchase price to the IMC acquisition and to the Nidus acquisition.

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SFAS 142 requires that goodwill and other intangibles that have an indefinite life are no longer to be amortized but are to be tested for impairment at least annually. In assessing impairment we must make judgments and assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective net assets. Other factors that could cause impairment could result from a significant decline in our stock price for a sustained period and our market capitalization relative to net book value. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge for the recorded goodwill. We conducted the impairment test for fiscal 2002 and concluded no impairment had occurred. Since we did not have any goodwill recorded prior to the IMC and Nidus acquisitions, the provision of SFAS 142 requiring companies to stop amortizing goodwill will have no impact on our ongoing operating results or the comparability of such results with prior periods.

Income Taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increases this allowance in a period, an expense is recorded within the tax provision in the consolidated statement of operations.

Variable Stock Options

In March 2000, the FASB issued Financial Interpretations No. 44 (“FIN 44”), “Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB Opinion No. 25).” This opinion provides guidance on the accounting for certain stock option transactions and subsequent amendments to stock option transactions. FIN 44 was effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. We have from time to time since 1991 granted stock options to our employees to purchase shares of our common stock. Certain of these options were canceled at the option of their holders on January 14, 1999, and then replaced that day on a one-for-one basis with new options with an exercise price equal to the closing market price that day.

The adoption of FIN 44 did not have a material impact on our financial position or results of operations. This interpretation requires variable accounting treatment for options that have been modified from their original terms. Accordingly, compensation cost shall be adjusted for increases or decreases in the intrinsic value of the modified awards in subsequent periods and until the awards have been exercised, forfeited, or expired. As of September 30, 2003, we have 231,438 outstanding options with an exercise price of $5.25 that are considered variable under this interpretation. Because the stock price since the effective date of July 1, 2000 has been below $5.25, we have not recorded any compensation cost related to the repriced options issued on January 14, 1999. Should our stock price climb above $5.25 our operating results will be affected until the stock options are either exercised or forfeited and could adversely affect any reporting period in which the variable accounting is required. Any charges that result from these variable options would be non-cash operating expenses and will be reported on a separate line item.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2003 with the Three Months Ended September 30, 2002

Revenues

	Three Months Ended September 30,				$ Change			% Change		2003 % of Total Rev		2002 % of Total Rev
	2003		2002
Healthcare	$	1,063	$	818	$	245		30.0	%	56.8	%	35.8	%
Internet	$	354	$	929	$	(575	)	-61.9	%	18.9	%	40.7	%
Education	$	452	$	533	$	(81	)	-15.2	%	24.1	%	23.3	%
Other	$	4	$	3	$	1		33.3	%	0.2	%	0.1	%
Total Net Revenues	$	1,873	$	2,283	$	(410	)	-18.0	%	100.0	%	100.0	%

Total revenues decreased $410,000, or 18.0%, to $1,873,000 for the three months ended September 30, 2003 compared to $2,283,000 for the three months ended September 30, 2002.

Revenues from the healthcare market increased $245,000, or 30.0%, to $1,063,000 for the three months ended September 30, 2003 compared to $818,000 for the three months ended September 30, 2002. The healthcare market includes the healthcare provider market, the health insurance and managed care market, and the pharmaceutical/biotech/medical device market. We are well positioned in the market as the demand for health information grows and as content becomes an increasingly important driver for business growth within the healthcare industry. We have also undertaken technological initiatives to enable our content products to be used in broader applications within the healthcare industry such as electronic medical records and other point-of-care applications. These two factors and our continuing efforts to expand our presence in the healthcare market contributed to the increase in healthcare market revenues during the three months ended September 30, 2003. As a percent of

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total revenues, revenues from the healthcare market increased to 56.8% for the three months ended September 30, 2003 compared to 35.8% for the three months ended September 30, 2002.

Revenues from the Internet market decreased $575,000, or 61.9%, to $354,000 for the three months ended September 30, 2003 compared to $929,000 for the three months ended September 30, 2002. The Internet market includes Internet portals and large media-related web sites that host a variety of consumer-oriented content and services. The decrease in our Internet revenues was primarily due to the expiration of our largest customer’s license agreement during the first quarter of 2003 that accounted for approximately 25% of revenues during the three months ended September 30, 2002. In light of the termination of this agreement, we have taken steps to reduce expenses, such as headcount reductions and reductions in our office lease expenses to compensate for this loss of revenue. This decrease was offset by the recognition of $62,000 of revenue from the IMC Consult Newsletter for the three months ended September 30, 2003. During the fourth quarter of 2002, we transferred to a company that publishes another newsletter all of our rights under subscription agreements relating to the IMC newsletter commencing with the January 2003 issue. As of September 30, 2003, we do not have any deferred revenue related to the IMC Consult newsletter, as we no longer have an obligation. As a percent of total revenues, revenues from the Internet market decreased to 18.9% for the three months ended September 30, 2003 compared to 40.7% for the three months ended September 30, 2002.

Revenues from the education market decreased $81,000, or 15.2%, to $452,000 for the three months ended September 30, 2003 compared to $533,000 for the three months ended September 30, 2002. The education market revenues consist primarily of CD ROM product sales. The decrease in our education market revenues was primarily associated with a $60,000 decrease in sales of our online subscription products and a $21,000 decrease in sales of CD ROM based product sales. As a percent of total revenues, revenues from the education market increased to 24.1% for the three months ended September 30, 2003 compared to 23.3% for the three months ended September 30, 2002.

Operating Expenses

	Three Months Ended September 30,							% Change		2003 % of Total Rev		2002 % of Total Rev
	2003		2002		$ Change
Costs of Revenues	$	420	$	360	$	60		16.7	%	22.4	%	15.8	%
General and Administration	$	487	$	636	$	(149	)	-23.4	%	26.0	%	27.9	%
Product and Content Development	$	281	$	592	$	(311	)	-52.5	%	15.0	%	25.9	%
Sales and Marketing	$	392	$	793	$	(401	)	-50.6	%	20.9	%	34.7	%
Depreciation and Amortization	$	217	$	220	$	(3	)	-1.4	%	11.6	%	9.6	%
Total Operating Expenses	$	1,797	$	2,601	$	(804	)	-30.9	%	95.9	%	113.9	%

Cost of revenues increased $60,000, or 16.7%, to $420,000 for the three months ended September 30, 2003 compared to $360,000 for the three months ended September 30, 2002. Cost of revenues includes shipped product components, packaging and shipping costs, newsletter printing costs, distribution license fees, royalties and amortization of capitalized software development costs. This increase was primarily the result of a $125,000 increase in distribution license fees from the sales of our Spanish language products and the sales of our third party licensing agreement products. This increase was offset by a $21,000 decrease in our IMC cost of revenues due to the transfer of subscription rights of the IMC newsletter to another publisher, a $31,000 decrease in our software amortization due to the complete amortization of several of our products, and a $12,000 decrease in cost of goods sold due to the decrease in our CD ROM based product sales. As a percent of total revenues, cost of revenues increased to 22.4% for the three months ended September 30, 2003 compared to 15.8% for the three months ended September 30, 2002.

General and administrative expenses decreased $149,000, or 23.4%, to $487,000 for the three months ended September 30, 2003 from $636,000 for the three months ended September 30, 2002. This decrease was primarily attributable to a $115,000 decrease in legal fees pertaining to our outstanding lawsuit, a $67,000 decrease in our rent expense due to the new lease for our Atlanta office, a $17,000 decrease in bad debt expense, a $17,000 decrease in taxes and licenses expense, and a $31,000 decrease in consulting expenses. This decrease was offset by a $57,000 increase in overall general and administration expenses, a $18,000 increase in fees associated with Nasdaq and investor relations expenses, and a $23,000 increase in consulting fees associated with the Restricted Common Stock Purchase Agreement. As a percent of total revenues, general and administrative expenses decreased to 26.0% for the three months ended September 30, 2003 compared to 27.9% for the three months ended September 30, 2002.

Product and content development expenses decreased $311,000, or 52.5%, to $281,000 for the three months ended September 30, 2003 from $592,000 for the three months ended September 30, 2002. This decrease was primarily attributable to a $136,000 decrease in salary expense due to reductions in headcount during 2002, a $39,000 decrease in consulting expenses, a $70,000 increase in capitalized expenses of internally developed products, and a $66,000 decrease in editorial expenses and overall product and content development expense. As a percent of total revenues, product development expenses decreased to 15.0% for the three months ended September 30, 2003 compared to 25.9% for the three months ended September 30, 2002.

Sales and marketing expenses decreased $401,000, or 50.6%, to $392,000 for the three months ended September 30, 2003 from $793,000 for the three months ended September 30, 2002. This decrease was primarily attributable to a $123,000 decrease in salary expense due to headcount reductions during 2002, a $102,000 decrease in overall sales and marketing expenses, and a $193,000 decrease in advertising expenses and direct mail expenses. This decrease was offset by a $17,000 increase in commissions and bonuses. As a percent of total revenues, sales and marketing expenses decreased to 20.9% for the three months ended September 30, 2003 compared to 34.7% for the three months ended September 30, 2002.

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Depreciation and amortization expenses decreased $3,000, or 1.4%, to $217,000 for the three months ended September 30, 2003 from $220,000 for the three months ended September 30, 2002. This decrease was primarily attributable to a $41,000 decrease in depreciation of assets. This decrease was offset by a $38,000 increase in amortization of purchased content. As a percent of total revenues, depreciation and amortization expenses increased to 11.6% for the three months ended September 30, 2003 compared to 9.6% for the three months ended September 30, 2002.

As a result of the factors described above, operating profit increased $394,000 to $76,000 for the three months ended September 30, 2003 compared to an operating loss of $318,000 for the three months ended September 30, 2002.

Other Expenses and Income

Interest income, net, was $10,000 for both the three months ended September 30, 2003 and the three months ended September 30, 2002.

For the three months ended September 30, 2003 and 2002, respectively, no provision has been estimated for income taxes.  We had sufficient net operating loss carry forwards to offset regular taxable income. As of September 30, 2003, we continue to maintain a valuation allowance against our total net deferred tax asset balance.

The results of operations of ThePort have been accounted for as an equity investment and accordingly, we recorded our share of ThePort’s results of operations in our consolidated financial statements. We recorded our share of ThePort’s losses of approximately $0 and $111,000 for the three months ended September 30, 2003 and September 30, 2002, respectively. At September 30, 2003, the carrying value of this investment was $0.

As a result of the above, we had a net income of $86,000 for the three months ended September 30, 2003 compared to a net loss of $419,000 for the three months ended September 30, 2002.

Comparison of the Nine Months Ended September 30, 2003 with the Nine Months Ended September 30, 2002

Revenues

	Nine Months Ended September 30,				$ Change			% Change		2003 % of Total Rev		2002 % of Total Rev
	2003		2002
Healthcare	$	3,183	$	2,064	$	1,119		54.2	%	51.8	%	31.5	%
Internet	$	1,762	$	3,018	$	(1,256	)	-41.6	%	28.6	%	46.1	%
Education	$	1,194	$	1,448	$	(254	)	-17.5	%	19.4	%	22.1	%
Other	$	12	$	13	$	(1	)	-7.7	%	0.2	%	0.1	%
Total Net Revenues	$	6,151	$	6,543	$	(392	)	-6.0	%	100.0	%	100.0	%

Total revenues decreased $392,000, or 6.0%, to $6,151,000 for the nine months ended September 30, 2003 compared to $6,543,000 for the nine months ended September 30, 2002.

Revenues from the healthcare market increased $1,119,000, or 54.2%, to $3,183,000 for the nine months ended September 30, 2003 compared to $2,064,000 for the nine months ended September 30, 2002. We are well positioned in the market as the demand for health information grows and as content becomes an increasingly important driver for business growth within the healthcare industry. We have also undertaken technological initiatives to enable our content products to be used in broader applications within the healthcare industry such as electronic medical records and other point-of-care applications. These two factors and our continuing efforts to expand our presence in the healthcare market contributed to the increase in healthcare market revenues during the nine months ended September 30, 2003. As a percent of total revenues, revenues from the healthcare market increased to 51.8% for the nine months ended September 30, 2003 compared to 31.5% for the nine months ended September 30, 2002.

Revenues from the Internet market decreased $1,256,000, or 41.6%, to $1,762,000 for the nine months ended September 30, 2003 compared to $3,018,000 for the nine months ended September 30, 2002. The decrease in our Internet revenues was primarily due to the expiration of our largest customer’s license agreement during the first quarter of 2003 that accounted for approximately 9% and 27%, respectively, of revenues during the nine months ended September 30, 2003 and 2002. This decrease was offset by the recognition of $136,000 of revenue from the IMC Consult Newsletter for the nine months ended September 30, 2003, as described above. As a percent of total revenues, revenues from the Internet market decreased to 28.6% for the nine months ended September 30, 2003 compared to 46.1% for the nine months ended September 30, 2002.

Revenues from the education market decreased $254,000, or 17.5%, to $1,194,000 for the nine months ended September 30, 2003 compared to $1,448,000 for the nine months ended September 30, 2002. The decrease in our education market revenues was primarily associated with a $168,000 decrease in sales of our online subscription products and a $86,000 decrease in sales of CD ROM based product sales. As a percent of total revenues, revenues from the education market decreased to 19.4% for the nine months ended September 30, 2003 compared to 22.1% for the nine months ended September 30, 2002.

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Operating Expenses

	Nine Months Ended September 30,				$ Change			% Change		2003 % of Total Rev		2002 % of Total Rev
	2003		2002
Costs of Revenues	$	1,296	$	1,021	$	275		26.9	%	21.1	%	15.6	%
General and Administration	$	1,312	$	1,727	$	(415	)	-24.0	%	21.3	%	26.4	%
Product and Content Development	$	1,124	$	1,906	$	(782	)	-41.0	%	18.3	%	29.1	%
Sales and Marketing	$	1,353	$	2,262	$	(909	)	-40.2	%	22.0	%	34.6	%
Depreciation and Amortization	$	588	$	714	$	(126	)	-17.6	%	9.6	%	10.9	%
Total Operating Expenses	$	5,673	$	7,630	$	(1,957	)	-25.6	%	92.3	%	116.6	%

Cost of revenues increased $275,000, or 26.9%, to $1,296,000 for the nine months ended September 30, 2003 compared to $1,021,000 for the nine months ended September 30, 2002. This increase was primarily the result of a $345,000 increase in distribution license fees from the sales of our Spanish language products and the sales of our third party licensing agreement products and a $28,000 increase in software amortization due to the creation of new products. This increase was offset by a $46,000 decrease in our IMC cost of revenues due to the transfer of subscription rights of the IMC newsletter to another publisher, a $40,000 decrease in cost of goods sold related to our CD ROM products, and a $12,000 decrease in fees for updates and printing expenses relating to our Well-Connected content. As a percent of total revenues, cost of revenues increased to 21.1% for the nine months ended September 30, 2003 compared to 15.6% for the nine months ended September 30, 2002.

General and administrative expenses decreased $415,000, or 24.0%, to $1,312,000 for the nine months ended September 30, 2003 from $1,727,000 for the nine months ended September 30, 2002. This decrease was primarily attributable to a $213,000 decrease in legal fees pertaining to the outstanding lawsuit, a $147,000 decrease in our rent expense due to the new lease for our Atlanta office, a $59,000 decrease in administration costs due to the closing of our IMC office located in Boston during 2003, a $41,000 decrease in bad debt expense, a $37,000 decrease in taxes and licenses expense, and a $41,000 decrease in salaries and overall general and administration costs due to headcount reductions during 2002 due to management’s continuing cost reduction measures. This decrease was offset by a $62,000 increase in fees associated with Nasdaq and investor relation expenses, a $26,000 increase in our general insurance expenses, and a $35,000 increase in consulting fees associated with the Restricted Common Stock Purchase Agreement. As a percent of total revenues, general and administrative costs decreased to 21.3% for the nine months ended September 30, 2003 compared to 26.4% for the nine months ended September 30, 2002.

Product and content development expenses decreased $782,000, or 41.0%, to $1,124,000 for the nine months ended September 30, 2003 from $1,906,000 for the nine months ended September 30, 2002. This decrease was primarily attributable to a $517,000 decrease in salary expense due to reductions in headcount during 2002, a $229,000 decrease in consulting expenses, a $66,000 decrease in content acquisition expense, a $155,000 decrease in overall product and content development expenses, and a $24,000 decrease in third party software licenses expense. This decrease was offset by a $209,000 decrease in capitalized expenses of internally developed products. As a percent of total revenues, product development expenses decreased to 18.3% for the nine months ended September 30, 2003 compared to 29.1% for the nine months ended September 30, 2002.

Sales and marketing expenses decreased $909,000, or 40.2%, to $1,353,000 for the nine months ended September 30, 2003 from $2,262,000 for the nine months ended September 30, 2002. This decrease was primarily attributable to a $435,000 decrease in salary expense due to headcount reductions during 2002, a $155,000 decrease in overall sales and marketing expenses, a $252,000 decrease in advertising expenses, a $59,000 decrease in travel expenses, and a $79,000 decrease in trade show expenses. This decrease was offset by a $71,000 increase in commissions and bonuses. As a percent of total revenues, sales and marketing expenses decreased to 22.0% for the nine months ended September 30, 2003 compared to 34.6% for the nine months ended September 30, 2002.

Depreciation and amortization expenses decreased $126,000, or 17.6%, to $588,000 for the nine months ended September 30, 2003 from $714,000 for the nine months ended September 30, 2002. This decrease was primarily attributable to a $188,000 decrease in depreciation of assets offset by a $24,000 increase in the amortization of purchased intellectual content and purchased customer contracts in connection with the acquisition of Nidus and a $38,000 increase in the amortization of purchased intellectual content in connection with assets that were purchased from HIP International, Inc. As a percent of total revenues, depreciation and amortization expenses decreased to 9.6% for the nine months ended September 30, 2003 compared to 10.9% for the nine months ended September 30, 2002.

As a result of the factors described above, operating profit increased $1,565,000 to $478,000 for the nine months ended September 30, 2003 compared to an operating loss of $1,087,000 for the nine months ended September 30, 2002.

Other Expenses and Income

Interest income, net, decreased $20,000, or 37.7%, to $33,000 for the nine months ended September 30, 2003, as compared to $53,000 for the nine months ended September 30, 2002. This net decrease was primarily attributable to a $13,000 decrease in interest income related to a note receivable outstanding and a $5,000 decrease in interest income related to a marketable security during the nine months ended September 30, 2002.

For the nine months ended September 30, 2003 and 2002, respectively, no provision has been estimated for income taxes. We had sufficient net operating loss carry forwards to offset regular taxable income. As of September 30, 2003, we continue to maintain a valuation allowance against our total net deferred tax asset balance.

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We account for our ownership of shares of capital stock of ThePort as an equity investment and accordingly, we have historically recorded our share of ThePort’s results of operations in our consolidated financial statements. However, since December 31, 2002, the carrying value of this investment has been $0 and we have not recorded any of ThePort’s results of operations. For the nine months ended September 30, 2002, we recorded $179,000 as our share of ThePort’s losses.

As a result of the above, we had a net income of $511,000 for the nine months ended September 30, 2003 compared to a net loss of $1,213,000 for the nine months ended September 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2003, we had cash and cash equivalents of $4,540,000 and working capital of $2,988,000.

Cash provided by operating activities was $2,146,000 during the nine months ended September 30, 2003 as compared to cash provided of $331,000 during the nine months ended September 30, 2002. This increase in cash provided was due primarily to decreases in accounts receivable, accrued expenses and depreciation expense, and increases in prepaid expenses and deferred revenue.

Cash used by investing activities was $378,000 during the nine months ended September 30, 2003 as compared to cash used of $647,000 during the nine months ended September 30, 2002. This decrease in cash used was due primarily to a decrease in software development costs during 2003, investment in affiliate activity during 2002, and for acquisition activity during the three months ended March 31, 2002.

Cash provided by financing activities increased to $552,000 during the nine months ended September 30, 2003 compared to cash used by financing activities of $707,000 during the nine months ended September 30, 2002. Cash provided by financing activities consisted of proceeds from the sale of common stock, the exercise of common stock options and from repayments on capital leases.

We also use working capital to finance ongoing operations, fund the development and introduction of new business strategies and internally developed software, acquire complementary businesses and acquire capital equipment.

On February 15, 2003, we entered into a Restricted Common Stock Purchase Agreement with James T. Atenhan and Victor P. Thompson (each a “Purchaser”) in connection with a consulting agreement with a financial services firm controlled by the Purchasers. Each Purchaser purchased 37,500 shares of our common stock at a purchase price of $.40 per share. The purchase price of our common stock was discounted from the $.78 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for services of $28,500. This deferred compensation was expensed over the six month service period.

On August 1, 2003, we entered into a second Restricted Common Stock Purchase Agreement with the Purchasers in connection with a twelve-month extension of the consulting contract. Each Purchaser has agreed to purchase 38,889 shares of our common stock at a purchase price of $.90 per share. The purchase price of our common stock is discounted from the $1.86 market price on the date we entered into the agreement. In connection with the sale, we recorded deferred compensation for services of $74,667. As of September 30, 2003, the shares had not been issued in connection with the agreement. This deferred compensation will be expensed over the twelve-month service period beginning September 1, 2003.

On May 22, 2002, we entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. Pursuant to this agreement, Fusion Capital agreed to purchase up to an aggregate of $12,000,000 of our common stock. We have the right to sell up to $15,000 of our common stock per trading day under this agreement unless our stock price equals or exceeds $7.00, in which case the daily amount may be increased at our option. Fusion Capital is not obligated to purchase any shares of our common stock on any trading days that the market price of our common stock is less than $1.00. Since we registered 3,500,000 shares for sale to Fusion Capital pursuant to the agreement, the selling price of our common stock to Fusion Capital will have to average at least $3.43 per share for us to receive the maximum proceeds of $12,000,000 without registering additional shares of common stock, which we have the right but not the obligation to do. Assuming a purchase price of $1.00 per share and the purchase by Fusion Capital of the full 3,500,000 shares under the agreement, proceeds to us would be $3,500,000. If we decided to sell more than the 1,352,100 shares to Fusion Capital (19.99% of our outstanding shares as of May 22, 2002, the date of the agreement, exclusive of the 160,000 shares issued to Fusion Capital as a commitment fee), we would first be required to seek shareholder approval of the agreement in order to be in compliance with Nasdaq rules. We may, but shall be under no obligation to, request our shareholders to approve the transaction contemplated by the agreement. We may terminate the agreement at any time, and Fusion Capital may terminate the agreement at any time after approximately 40 months following the date the purchase obligation under the agreement became effective. During the three months ended September 30, 2003, we sold 121,213 shares for $200,000 under this agreement. During the nine months ended September 30, 2003, we sold 386,566 shares for $525,000 under this agreement.

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During 2002 and 2001, we acquired additional preferred stock interests in ThePort, for $250,000 and $275,000 in cash, respectively. During 2002, we also accepted 196,616 shares of common stock of ThePort valued at approximately $49,000 pursuant to the sublease agreement ThePort signed with us (see paragraph below). As of September 30, 2003, we have an approximate 35% voting interest in ThePort. Our voting interest increased from December 31, 2002 due to our Series B preferred stock investment being converted into common stock at a one-to-five conversion rate. As of September 30, 2003 and December 31, 2002, the carrying value of this investment was $0. We have no future obligations to fund ThePort.

In connection with this preferred stock investment in 2001, we entered into a five-year agreement that provided us exclusive distribution rights to ThePort’s products within the healthcare industry. As of December 31, 2001, we had pre-paid $125,000 of the contract fee to be applied against future subscription fees. We had committed to generate $1,500,000 in subscription fees during the initial term of the agreement. The initial term of the agreement commenced on August 20, 2001 and was to continue for five years from that date. On February 14, 2003, ThePort agreed to accept an additional payment of $125,000 from us which released us from the minimum guarantee in its entirety. ThePort is entitled to retain the $125,000 pre-payment previously made and we are granted non-exclusive rights to ThePort’s products within the healthcare industry.

On April 10, 2002, for a term beginning on November 1, 2001, we signed an 8-month sublease agreement with ThePort. We received 14,044 shares of ThePort’s common stock monthly over the term of the agreement, which rate was determined based upon the fair market value of the leased space and ThePort common stock as of April 10, 2002. After the expiration of the sublease on September 30, 2002, we have continued to sublease this space to ThePort on a month-to-month basis for the same monthly consideration.

On May 30, 2001, we received a full-recourse Promissory Note from our Chief Executive Officer for approximately $341,000 for the exercise of 150,000 options at $1.94 per share. The note accrues interest at the rate of 6.25% per annum and is due in full on or before May 29, 2006. Part of the note, $291,000, is secured by 150,000 shares of our common stock and is reflected as shareholders’ equity. Through September 30, 2003, approximately $49,000 of interest has been accrued on this note of which $45,000 has been paid, leaving a remaining interest balance of $4,000.

We have also entered into certain agreements to license content for our services from various unrelated third parties. We also have contractual obligations at September 30, 2003 relating to real estate, capital and operating lease arrangements.

Total payments due and estimated under license agreements and real estate, operating and capital leases for the remainder of 2003 and beyond are listed below:

Year	License Agreements		Real Estate Leases		Operating Leases		Capital Leases		Total
2003	$	53,000	$	65,000	$	11,000	$	4,000	$	133,000
2004	210,000		225,000		33,000		15,000		$	483,000
2005	100,000		229,000		3,000		15,000		$	347,000
2006	—		234,000		—		15,000		$	249,000
2007	—		239,000		—		11,000		$	250,000
Thereafter	—		182,000		—		—		$	182,000
	$	363,000	$	1,174,000	$	47,000	$	60,000	$	1,644,000

Management believes that cash on hand, together with anticipated cash flows from operations, will be sufficient to meet our working capital needs for the next twelve months. However, we may be required to raise additional funds in order to accelerate development of new and existing services and products, to respond to competitive pressures or to possibly acquire complementary products, businesses or technologies. There can be no assurance that any required additional financing will be available on terms favorable to us, or at all. If additional funds are raised by the issuance of equity securities, our shareholders would experience dilution of their ownership interest and these securities may have rights senior to those of the holders of the common stock. If additional funds are raised by the issuance of debt securities, we may be subject to certain limitations on our operations, including limitations on the payment of dividends. If adequate funds are not available or not available on acceptable terms, we may be unable to take advantage of acquisition opportunities, develop or enhance services or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

We do not have any material off-balance sheet arrangements.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made in this report, and other written or oral statements made by or on behalf of A.D.A.M., may constitute “forward-looking statements” within the meaning of the federal securities laws. When used in this report, the words “believes,” “expects,” “estimates,” “intends” and similar expressions are intended to identify forward-looking statements. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, intentions, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of such statements in this report include descriptions of our plans and strategies with respect to developing certain market opportunities, our overall business plan, our plans to develop additional strategic partnerships, our intention to develop certain platform technologies and our continuing growth. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. We believe that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. These statements are based on

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current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.

In addition to other factors addressed elsewhere in this report, the following are certain of the factors that could cause our actual results to differ materially from the expected results described in our forward-looking statements:

•Although we reported net income for the three and nine months ended September 30, 2003, we have incurred substantial losses in the past.  We experienced losses of $1,530,000 in 2002, income of $1,597,000 in 2001 and losses of $7,854,000 in 2000. We cannot offer any assurance that we will be able to sustain profitability in the future.

•We may be unable to obtain sufficient capital to pursue our growth and market development strategies, which would hurt our financial results. We can offer no assurance that our revenues will be sufficient to cover our expenses or that capital will be available to us on satisfactory terms or at all, to fund any shortfall in these costs and revenues.

•We may be unable to compete effectively with other online providers of healthcare information, which could cause our growth and market development strategies to be unsuccessful. The market for providing healthcare information is intensely competitive, and competition could increase in the future. As this market develops, we expect our sensitivity to competitive pressures to be especially strong as we continue to attract and retain customers. We may not be able to compete effectively against these companies, and if we fail to compete effectively we may suffer reduced gross margins and loss of market share.

•The healthcare information market is rapidly evolving and subject to rapid technological change. Certain companies could enter this market that could be larger and more established than we are. These competitors could have advantages over us because of their longer operating histories, greater name recognition, or greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They could also devote greater resources to the promotion and sale of their products or services. Furthermore, mergers and acquisitions among other companies could intensify our existing competition or create new competitors.

•We rely on a limited number of customers for a significant portion of our revenues, and our largest customer in 2002 did not renew its license agreement when it recently expired.  Our largest customer during 2002 did not renew its license with us when the license expired in March of 2003, and this loss will materially impact our future revenues.  Although we have taken steps to counter the loss of revenue from that customer, we can offer no assurance that the loss of that customer, or the possible loss of other significant customers, will not materially adversely affect our business.

•We face technological challenges in our ability to deliver customized information in the rapidly changing healthcare industry, which may limit our ability to maintain existing customers or attract new customers. We believe that health information will become more customized to an individual’s personal health management needs. As a result, we will need to have adequate technology infrastructure that will allow us to deliver in a cost effective manner portions of our content assets based on each customer’s requirements. We will be required to utilize, without significant prior experience, technologies related to content management and content distribution. A failure to develop or obtain this technology could adversely affect our ability to maintain market share or acquire new customers.

•We may be unable to successfully identify, acquire, manage or integrate complementary businesses. Our long-term growth strategy may include acquiring businesses with complementary products, technologies or professional services. Moving forward, we may not be successful in acquiring other complementary businesses or assimilating their personnel and operations. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Future acquisitions may also cause us to incur expenses such as in-process research and development expenses, which may negatively affect our earnings. We cannot be certain that we will successfully overcome these risks with respect to any future acquisitions. In addition, we have historically paid a portion of the consideration for some our acquisitions by issuing common stock. The issuance of additional common stock or other securities convertible into common stock in connection with future acquisitions would dilute the ownership interests of our existing shareholders.

•We may be unable to attract new personnel, which would adversely affect implementation of our overall business strategy. In order to promote the development of our target markets, we will need to identify, attract and retain software engineers, web designers, sales and marketing professionals and other key personnel. We will compete with other companies both within and outside our markets for such employees and we may be unable to attract these employees. If we do not succeed in attracting these types of new employees, we may be unable to fully implement our growth and market development strategies and our business will suffer.

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•Our stock price is extremely volatile and could decline significantly. Since our initial public offering in 1995, there has been significant volatility in the price of our common stock. This volatility has often been unrelated to our operating performance. There can be no assurance that the market price of our common stock will be maintained or that the volume of trading in our shares will not decrease. Furthermore, following periods of volatility in the market price of a company’s securities, securities class action claims frequently are brought against the subject company. To the extent that the market price of our shares falls dramatically in any period of time, shareholders may bring claims, with or without merit, against us. Such litigation would be expensive to defend and would divert management attention and resources regardless of outcome.

•We have adopted certain anti-takeover provisions that may deter a takeover. Our articles of incorporation and bylaws contain provisions that may deter a takeover, including a takeover on terms that many of our shareholders might consider favorable, such as: the authority of our board of directors to issue common stock and preferred stock and to determine the price, rights (including voting rights), preferences, privileges and restrictions of each series of preferred stock, without any vote or action by our shareholders; the existence of large amounts of authorized but unissued common stock and preferred stock; staggered, three-year terms for our board of directors; and advance notice requirements for board of directors nominations and for shareholder proposals. The rights and preferences of any series of preferred stock could include a preference over the common stock on the distribution of our assets upon a liquidation or sale of our company, preferential dividends, redemption rights, the right to elect one or more directors and other voting rights. The rights of the holders of any series of preferred stock that may be issued in the future may adversely affect the rights of the holders of the common stock. We have no current plans to issue preferred stock. In addition, certain provisions of Georgia law and our stock option plan may also discourage, delay or prevent a change in control of our company or unsolicited acquisition proposals.

•A significant number of unissued shares are available for future sale and could adversely affect the market price of our common stock. If our shareholders, option holders, or warrant holders exercise their rights to sell substantial amounts of our common shares in the public market, the market price of our common stock could fall. Given the unpredictable transaction volumes for our common stock, the sale of a significant amount of these shares at any given time could cause the market price of our common stock to decline or otherwise be highly volatile. Such sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price when we deem conditions to be more favorable.

•Our principal shareholders have substantial influence and their interest may differ from those of our remaining shareholders. As of September 30, 2003, our executive officers, directors and persons who beneficially own more than 5% of our outstanding common stock controlled approximately 24.8% of the combined outstanding voting power of our common stock. As a result, these holders exert substantial influence with respect to all matters submitted to a vote of holders of common stock, including election of our directors. If our remaining shareholders have interests that differ from these holders, their needs may not be met.

•Our Stock Purchase Agreement with Fusion Capital Fund II, LLC may result in significant dilution of our other shareholders. On May 22, 2002, we entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC. Pursuant to this agreement, Fusion Capital has agreed to purchase up to an aggregate of $12,000,000 of our common stock. We have the right to sell up to $15,000 of common stock per trading day under this agreement with Fusion Capital unless our stock price equals or exceeds $7.00, in which case the daily amount may be increased at our option. Fusion Capital is not obligated to purchase any shares of our common stock on any trading days that the market price of our common stock is less than $1.00. Sales of our common stock under this agreement would dilute the ownership of shareholders other than Fusion Capital Fund II, LLC.  As of September 30, 2003, we have sold 386,566 shares for $525,000 under this agreement.

ITEM 3. CONTROLS AND PROCEDURES

Our Chief Executive Officer and acting principal financial officer have evaluated our disclosure controls and procedures as of the end of the period covered by this filing, and they concluded that these controls and procedures are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

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PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

On August 1, 2003, we entered into a Restricted Common Stock Purchase Agreement with James T. Atenhan and Victor P. Thompson (each a Purchaser and collectively, the Purchasers) in connection with a consulting agreement with a financial services firm controlled by the Purchasers. Each Purchaser agreed to purchase 38,889 shares of our common stock at a purchase price of $.90 per share. As of September 30, 2003, the shares had not been issued in connection with the agreement. The purchase price of our common stock was discounted from the $1.86 market price on the date we entered into the agreement. The offer and sale of the shares to the Purchasers is exempt from the registration requirements of the Securities Act of 1933 (the Act) pursuant to Rule 506 and Section 4(2) of the Act. In connection with the sales, we provided each of the Purchasers the information required pursuant to Rule 502 of Regulation D, did not conduct any general solicitation or advertising, and complied with the requirements of Regulation D relating to the restrictions on the transferability of the shares issued.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

The following exhibits are filed with this report:

Exhibit Number	Exhibit Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

During the three months ended September 30, 2003, we filed a Form 8-K on July 30, 2003 regarding our press release to announce second quarter results for 2003.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	A.D.A.M., Inc.
	(Registrant)
By:	/s/ ROBERT S. CRAMER, JR.
	Robert S. Cramer, Jr.
	Chairman of the Board and
	Chief Executive Officer
By:	/s/ KEVIN S. NOLAND
	Kevin S. Noland
	Chief Operating Officer and Corporate Secretary
	(acting principal financial and accounting officer)
	Date: November 14, 2003

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EXHIBIT INDEX

Exhibit Number	Exhibit Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert S. Cramer, Jr., Chief Executive Officer of the registrant, certify that:

(1)           I have reviewed this quarterly report on Form 10-QSB of A.D.A.M., Inc.;

(2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which statements were made, not misleading with respect to the period covered by this quarterly report;

(3)Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely  affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 14, 2003

/s/ ROBERT S. CRAMER, JR.

Robert S. Cramer, Jr.

Chairman and Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kevin S. Noland, Chief Operations Officer of the registrant, certify that:

(1)   I have reviewed this quarterly report on Form 10-QSB of A.D.A.M., Inc.;

(2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which statements were made, not misleading with respect to the period covered by this quarterly report;

(3)Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely  affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 14, 2003

/s/ Kevin S. Noland

Kevin S. Noland

Chief Operating Officer and Corporate Secretary (acting chief financial and accounting officer)

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of A.D.A.M., Inc. (the “Company”) on Form 10-QSB for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Robert S. Cramer, Jr., President and Chief Executive Officer of the Company, and Kevin S. Noland, Chief Operating Officer and acting chief financial and accounting officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  Robert S. Cramer, Jr.

Robert S. Cramer, Jr.

President and Chief Executive Officer

November 14, 2003

/s/  Kevin S. Noland

Kevin S. Noland

Chief Operating Officer and Corporate Secretary (acting chief financial and accounting officer)

November 14, 2003

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